Qualified retirement plans are subject to Required Minimum Distribution (RMD) rules which, very generally, require that a minimum amount of benefit commence no later than April 1 following the year when a participant attains age 70 ½. It is important to protect your qualified plan from RMD failures to avoid potential tax consequences.

One way the IRS and DOL check a plan for compliance with the RMD rules is through the Form 5500 filing question “has the plan failed to provide any benefit when due under the plan?” If your plan has RMDs that have not commenced as required, this question must be answered affirmatively; however, there is an exception in the case of participants that cannot be located for whom a reasonable search has been made.

Furthermore, when a plan is audited by the IRS, the agent will check that the RMD rules have been followed. If an IRS agent discovers a failure, a correction will be necessary, and it’s possible there will be negative tax implications to the participant and administrative hassles to the plan sponsor to get it corrected. Often when a failure occurs, it is because the plan sponsor could not locate the participant. This is a valid concern, especially in defined benefit plans that have participants who have not been employed by the plan sponsor for many years. The IRS recently responded to this concern by issuing a field directive that outlines guidelines under which the IRS agent may overlook (i.e. not challenge) the failure.

The IRS memo directs the agent to not challenge the RMD failure if the plan sponsor has:

searched plan and related-plan records, as well as publicly-available records for alternative contact information;

used any of the following search methods: commercial locator service, credit reporting agency, or a proprietary internet search locator tool; and

attempted contact through the U.S. Postal Service certified mail with the last known mailing address, and through other address or contact information such as email address and telephone numbers.

The correction of an RMD failure requires great efforts by several parties that could be avoided if minimum distributions from the plan commence properly. To help protect a plan from RMD failures and the administrative cost and hassle that follows, a plan sponsor should adopt an internal system to

contact those who are approaching Normal Retirement Age (and at the latest age 70 ½) to start the benefit payment process, and

document efforts made to locate missing participants, following the IRS guidelines.

Initiating a process for tracking these participants will assist in complying with the RMD rules. And for defined benefit plans tracking terminated employees, it will also create a more efficient system of getting participants into pay status when benefits are due. For additional information regarding RMD rules for defined benefit plans, read Required Minimum Distributions from Defined Benefit Plans.

Please contact Watkins Ross if you have questions or concerns regarding locating participants, starting an RMD, or correcting a failure.

IRS CIRCULAR 230 DISCLOSURE: As stated above, Watkins Ross does not provide tax advice. To the extent this communication (including attachments), mentions or discussed any tax matter, it is not intended or written to be used, and cannot be used by the recipient or any other person, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party the matter addressed herein. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.